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Orosur Mining (LSE:OMI), the AIM and Canada listed, South America focused gold producer and explorer much beloved by my fat friend Evil Knievil, last month announced the completion of a development that “will enable the company to access higher grade transverse stope ore at Arenal Deeps for the first time in the last quarter of the financial year ending 31 May 2013”. That seems like good news yet the shares now trade at lows not seen since 2010 – a current 32.125p share price capitalising the company at little more than £25 million.
To read my previous update on Orosur click HERE
Orosur operates the only producing gold mine in Uruguay (San Gregorio) and the completed ramp and lateral waste development, in enabling production from transverse stopes, is expected to help the company achieve its forecast production target of 63,000 – 68,000 ounces for its year to 31st May. However, some lower than anticipated open pit grades mean cash costs for the year of $1,000 – $1,065 per ounce are now anticipated, up from $975 previously forecast. Together with additional investment in the Uruguay mine and some exploration assets in Chile, year-end cash is also expected to be lower than previously anticipated, at approximately $8 million (based on production of 65,750 ounces and a gold price of $1,625 an ounce).
I note the gold price is slightly below this level at currently $1,580 per ounce, though – as per my previous update – the company has commented that, post the end of the current year, it expects to “generate significant operating cash with lower levels of capital expenditure during the three years to 31 May 2016” and that that it will seek to “maximise our free cash flow” in this period by targeting San Gregorio production at between 60,000 to 70,000 ounces per annum at an average cash cost of $810 per ounce.
Even at a $1,500 gold price, an annual 65,000 ounces costing $810 per ounce would throw off $44.85 million of cash (£29.7 million). The current valuation thus reflects investor uncertainty on the company’s ability to deliver. A mixed recent track record means this is justified to a degree, but the valuation continues to look overly harsh to me. The more cautious investor may wish to wait for evidence of delivery on current expectations but, for the more adventurous investor, I continue to rate these shares a speculative buy.
Tom Winnifrith writes for 10 UK and US websites. Always controversial and sometimes right you can follow him on twitter @tomwinnifrith or get links to all of his free to access articles at www.TomWinnifrith.com
